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(1) Exposure to loss as a result of default on a swap, debt, or other counterparty instrument. (2) Exposure to loss as a result of a decline in market value stemming from a credit downgrade of an issuer or counterparty. Credit risk may be reduced by credit screening before a transaction is effected or by instrument provisions which attempt to offset the effect of a default or which require increased payments in the event of a credit downgrade. (3) A component of return variability resulting from the possibility of an event of default. (4) A change in the market's perception of the probability of an event of default, which affects the spread between two rates or reference indexes. See, for example, Treasury EuroDollar (TED) Spread (diagram). See Credit or Counterparty Risk discussion pp 8-9.
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Credit risk - Find out the latest regulatory views on credit risk by clicking "Key Risk Concepts: Credit Risk"
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